Private equity funds focused on real estate investments in India are finding it hard to raise funds overseas with investors not confident they will make decent money.

What’s making the fund-raising difficult is that the funds are looking for deep-pocketed investors who can subscribe to more than 50% of the corpus, pegged, on average, at 0 million. (Photo: Reuters)

Private equity funds focused on real estate investments in India are finding it hard to raise funds overseas with investors not confident they will make decent money. A host of companies including IDFC, Piramal, Red Fort, HDFC, ASK Property Investment Advisor, India Infoline and Edelweiss are scouting for investors. Between them, half a dozen funds are looking to mop up close to $2.5 million, an ambitious sum not met since 2008. A JLL India report says offshore funds raised around $4.4 billion in 2008 but between June 2014 and June 2015, inflows into PE funds amounted to just $1.4 billion.

Investors’ concerns are justified given the investments made between 2005 and 2008 have largely not delivered returns. As Prakash Kalothia, CEO and MD, Sun-Area Property Partners, says, limited partners can now reference one full fund cycle of seven years. “For various reasons, those investments have not yielded promised returns so naturally they are hesitant,” Kalothia said, adding that the poor fundamentals apart, the rupee’s steep fall has also eaten into the gains. The Indian currency has depreciated by close to 40% between 2008 and 2015.

That projections have not lived up to returns may not erode the sector’s underlying demand potential. But fund managers are having to answer some tough questions overseas. ASK MD and CEO Amit Bhagat says investment communities are far more rigorous on due diligence today than they were. “They’re focusing more on the risk management framework of funds and track record of managers,” he said.

What’s making the fund-raising difficult is that the funds are looking for deep-pocketed investors who can subscribe to more than 50% of the corpus, pegged, on average, at $400 million.

One fund manager who did not wish to be named said that in the past five years, no fund has been able to raise a “co-mingled” fund, a structure in which there is no dominant partner.

Also, over the years, several marquee investors such as GIC, CPPIB, APG, QIA and ADIA who subscribed to PE funds have now set up shop on their own in India with large deployment targets. These players are now looking to team up with companies directly, a strategy that is popular with investee companies.

For instance, the joint venture between APG and Godrej Properties has been a successful one, enabling Godrej to strengthen its balance sheet and buy four parcels of land in less than two years. “The advantage of having a long-term investor is that one has access to equity, which is essential from a cash flow perspective,” explained Pirojsha Godrej, managing director at Godrej Properties.

Fund managers concede that direct investments of investors into companies like DLF, Godrej Properties, RMZ, Nitesh Estates and Piramal Realty does shrink the pie for them somewhat.

Investors also want a say in the investments. Rajeev Bairathi, ED and head of capital markets, Knight Frank India, points out that earlier most funds were raised as discretionary funds, allowing the fund manage discretion. “Now fund managers often have to identify the asset class and make a case for its potential before raising money,” Bairathi said.

A November report on private equity by JLL India said that before 2009, 34% funds were asset-focused whereas since 2014, 80% of the funds had turned asset-focused. Moreover, negotiations and due diligence is taking longer now. “While fund closures earlier took six to eight months, now the process is taking up to 24 months,” Bhagat said.